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Gloom in the market has not only impacted the fortunes of investors but also cast its shadow on the promoters of companies.
According to an analysis of BSE-500 companies for the quarter ended June, the aggregate number of shares pledged as a percentage of those held by promoters rose to 33.2 per cent from 28.9 per cent in the March quarter and 26.4 per cent in the one a year before. Most promoters who have pledged their shares have done so as collateral to raise working capital or a term loan, to increase their holding or to fund an acquisition. Experts say promoters are forced to pledge shares with lenders in return for loans due to the liquidity crunch.
Says A K Prabhakar, senior vice-president (equity research), Anand Rathi: "There can be multiple reasons why the pledging has increased. One of the obvious ones is that the Nifty (the National Stock Exchange's benchmark index) has not corrected much but over 50 per cent of stocks are below the 2008 lows. So, the value of the total pledge has actually come down significantly. Hence, the promoters have to increase the amount of pledged shares to meet the requirement. The money market, too, has become tight. Pledging shares has become an easy way of raising short-term capital."
Within the BSE top 500, the promoters of 120 companies had pledged their shares as of the June quarter. Overall, the aggregate number of shares pledged as a percentage of those held by promoters rose to 12.5 per cent from 11.4 per cent in the March quarter and a little less than 10.7 per cent at the end of the June 2012 quarter.
The value of shares pledged by the promoters of these companies rose to Rs 100,000 crore in the three months ended June from Rs 88,839 crore in the March quarter, as companies faced a liquidity crunch and high working capital requirements at a time when economic conditions remained challenging. The calculation is based on the average market price of the respective quarters.
For instance, the Vedanta group has pledged 38.7 per cent of shares to refinance the debt taken for Cairn India's acquisition. This amounts to 65.8 per cent of its 58.8 per cent holding in the Indian oil and gas major.
The pledged shares are of Twin Star Energy Holdings Ltd (TSEHL), which holds all the equity in Twin Star Mauritius Holdings Ltd (TSMHL), which in turn holds 38.68 per cent in Cairn India. TSEHL has pledged its entire holding in TSMHL.
Of the total, those belonging to entertainment, realty, infrastructure, capital goods, oil and gas and pharmaceuticals saw the largest rise in percentage of shares pledged during the quarter. On the other hand, Tata Group companies such as Tata Motors, Tata Consultancy Services and Tata Power Company saw a decline in pledged shares.
"There is a change of management in the Tata Group. The new management is not looking at expanding aggressively and increasing the debt levels. Instead, they want to consolidate the business, reduce the debt component, clean up the balance sheet, increase the profitability and make the businesses more viable. Thus, there is little surprise that the pledges have come down. I think this is the most appropriate approach in the current market conditions," says Prabhakar.
Companies such as Siti Cable, Dish TV, Elder Pharma, Kalpataru Power Transmission, Apollo Hospitals, Unitech, Orchid Chemicals & Pharmaceuticals and Core Education Technologies have increased their pledged shares between the June and March quarters.
Interestingly, there were five companies, including Elder Pharma, Pipavav Defence, United Spirits and Housing Development & Infrastructure Ltd, where owners have pledged their entire stake.
Those of another nine companies, such as Wockhardt, Hindustan Construction Company, Lanco Infratech, Parsvnath Developers, DB Realty and Unitech, have pledged a little more than 80 per cent of their shares.
"I am not positive about any company where promoters are pledging their shares to borrow money because this is something that is an inherent risk and can create panic into the system. Many promoters are operating at a high risk level. Borrowing money against own shares is counter-productive when the economic situation is bad," said Deven Choksey, managing director, KR Choksey Securities.
In contrast, some companies -- including Aurobindo Pharma, Emami, JSW Steel, Ajanta Pharma and Nitin Fire Protection Industries -- saw a drop in percentage of stake pledged in the June quarter.
